Draft CFI soil carbon sequestration methodology released

The draft methodology documents for Sequestering Carbon in Soils in Grazing Systems are open for public consultation until 6 May 2014.

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Farmers have new opportunities to benefit from the Australian Government's Carbon Farming Initiative (CFI), and, in turn, may have opportunities to benefit from the Government's Direct Action plan, with the release of a new CFI methodology for sequestering carbon in soils.

The Government proposed the use of carbon sequestration in soils when in opposition in the lead-up to the 2013 Federal Election, and it also signalled that its Direct Action plan for reducing carbon emissions (as an alternative to the existing Carbon Pricing Mechanism (CPM)) would use the CFI architecture as a legislative foundation.

Now the Government has added the sequestration of carbon in soils to the list of activities which are eligible for generation of Australian carbon credit units (ACCUs) under the CFI (known as the "Positive List"), and on 31 March it released for public comment the draft methodology documents for Sequestering Carbon in Soils in Grazing Systems. The draft methodology documents are open for public consultation until 6 May 2014.

Recap on the CFI

The CFI is a Federal Government initiative to enable land sector participants to generate revenue through the reduction of carbon emissions (via sequestration or emissions avoidance), by undertaking projects in accordance with approved project methodologies. Projects which meet the CFI criteria and are registered under the CFI, and demonstrate carbon emission reductions, are awarded a number of ACCUs which is commensurate with the extent of emissions reduction.

These ACCUs can be sold to third parties, including (in some cases) persons who have a CPM liability and want to use the ACCUs to offset that liability, or (in all cases) buyers in the voluntary carbon markets who want to offset carbon emissions. The CFI is administered by the Clean Energy Regulator (CER).

The CFI has been operating for over two years and, in this time, 22 methodologies have been approved and over 100 projects registered. Approved methodologies include increasing environmental plantings and farm forestry, reducing emissions from savannah burning, reducing methane emissions from piggeries and dairies and reducing landfill gas emissions.

One of the comments made about the implementation of the CFI to date is that rural landholders have had limited involvement. Most of the ACCUs which have been issued so far are for emissions avoidance at landfill operations.

CFI and Direct Action

The release of the draft soil carbon methodology is in line with the Government's commitment to increase the scope and application of the CFI by adding new methodologies to the scheme in preparation for the commencement of the Emissions Reduction Fund (ERF), which is the centrepiece of the Government's Direct Action plan. The Government has said it will release draft legislation for the ERF this month, and it proposes to have the legislation passed and the ERF commence operation on 1 July 2014. The Government expects the new soil carbon methodology to be approved and operational by this time.

A focus of the Government's Direct Action plan is to meet Australia's international greenhouse gas emission reduction commitments through the expansion and development of the CFI. The ERF is anticipated to fund a reverse auction of ACCUs which project proponents expect to generate from approved CFI projects.

The Government's intention to expand the number of approved methodologies under the CFI, such as soil carbon sequestration and reducing livestock emissions, will bring increased opportunity for land managers and agribusiness to generate revenue through the creation and trading of ACCUs.

Sequestering soil carbon

Soil carbon sequestration is a process in which CO2 is removed from the atmosphere and stored in the soil carbon pool. This process is primarily mediated by plants through photosynthesis, with carbon stored in the form of soil organic carbon (SOC). Restoring the levels of SOC in soil can be achieved, for example, through management of grazing systems, crop rotation, and low or no use of fertilisers. Aside from producing emission reductions, it's anticipated that sequestering soil carbon will have ancillary benefits of building farm resilience to drought and assisting with irrigation and erosion.

The inclusion of the new soil carbon methodology on the Positive List indicates that it has met the additionality test of the Carbon Credits (Carbon Farming Initiative) Act 2011 (CFI Act). This means that the approved land management actions are not "common practice" in the management of grazing systems and have been found to increase the amount of carbon stored in the soil.

Critics argue that it is difficult to achieve increased soil carbon stocks on a permanent basis. The Government has partially addressed this concern by incorporating a shortened period of permanence, from 100 to 25 years, to accommodate for projects that struggle to meet the 100 year permanence threshold. This shortened level of permanence will be reflected in the number of ACCUs that are issued for abatements achieved under the soil carbon methodology.

Proposed methodology

The draft methodology outlines the eligibility and land management requirements for soil carbon sequestration projects.

To be eligible as a project under the new soil carbon methodology, the project area must either:

have been under permanent pasture for a period of five years prior to the project start date; or

convert to permanent pasture as part of the project management actions.

The Project Area must also remain as permanent pasture for the duration of the project.

Approved land management actions may include, for example:

converting cropland to pasture;

undertaking pasture cropping; and

changing the pasture species mix or grazing patterns.

Several types of land management actions are excluded from the methodology, such as:

The permanent de-stocking of grazing systems;

Tillage (other than "eligible tillage");

Importing or applying crop residue, hay, straw or plant material (other than compost) in the project area in specified situations; and

Conversion of forest to pasture of other removal of woody vegetation from within the project area.

The draft methodology documents indicate that project proponents would need to measure changes in soil carbon levels to demonstrate sufficient carbon capture to justify the issue of ACCUs.

Next steps

After the period of public consultation has closed, the Department of Environment will resubmit its proposed methodology for assessment by the Domestic Offsets Integrity Committee. If it approves the methodology, it will be referred for consideration by the Minister for the Environment. If the Minister approves the methodology, it will be available for use by projects seeking to generate ACCUs.

The commencement of the ERF depends not only on the Australian Senate passing legislation to establish the ERF, but also legislation repealing the CPM. It is not clear when the Government will have the necessary support in the Senate to achieve this. In the meantime, the CFI will continue to operate and derive support from the CPM, but, given the current legislative uncertainty, it is unlikely projects will progress at this stage.

Consequently, all eyes are on the release of the draft ERF legislation and the accompanying Direct Action White Paper, which are due this month.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.